The arrival of Social Media (Groups / Forums / Twitter / FB / Whatsapp among others) have proved to be a boon to the ordinary investor / trader. The impact it has on my own career is pretty significant and something that I cherish especially since I started my career before the advent (in the way it is today) of Internet.
Back in those days, information was scratchy and the only people one interacted with were those who you knew personally. And unless you were in Mumbai or a major city where investing in the markets were not looked into as a crime (comparable to any other gambling avenues), the percentage of people who knew much was rather limited (personal experience) and you had to be really lucky to be able to have them as friends.
Internet has changed those things quite a bit. Now, you can talk, question and discuss the pro’s and con’s of any company that seems to catch your fancy. Crowd-sourcing is the new mantra with one needing to just start to get others to put up their views as to what is right and what is wrong about a particular investment or strategy. In other words, one can get a peer review done literally for free and all that without having to move an inch from the computer
While the advantages of using such crowd-sourced networks for information is pretty useful, the fact also remains that its not honey and ghee all the way. The ability of such discussions to cloud our judgement is pretty huge.
Take for example the fact that most investors under-perform the indices on the long run (academic research, mostly done in US). But spend a little time and you can barely see many anything lesser than what the best fund manager has done in his best year. And most are then humble enough to point out that they are just a small – part time investor / trader.
The above scenario is true regardless of whether the writer is using his real name or writing using a Anon ID (not that either makes much difference since unless the guy really wants to meet, even with a real name, he can be as much Anon as a ID which hides the name as well). What really pisses me off is the ability of these guys to influence those who are easily swayed by opinions of others. While they themselves are barely invested (using say % of networth invested), they cause disproportionate damage to the psychology of smaller investors who are generally more scared of the markets. Of course, Darwin theory holds good here, the strongest survive while the weak shall get annihilated.
Way back in the 2000, when the IT bull run was in full fury, we had a client – a Chartered Accountant no less who was investing through our brokerage firm for quite some time. He had over time accumulated a good portfolio of stocks, most of them either in cyclic business or the general Hindustan lever / Ponds India / Broke Bond kind of MNC shares.
For much of the bull run, he was able to keep his head light on how stocks outside his portfolio (specifically IT stocks) were going like there was no tomorrow. While I do not remember the conversations I used to have with this gentleman with much clarity (its been 14 long years now), I do know that some where down the line, pressure of seeing other investors doing much better than him (heck, we had a client who could not sign his own name make a bundle in a stock called Octagon Technologies) finally broke him down. So, one fine day, he decided to swap much of his portfolio as well as invest fresh funds into a portfolio of IT stocks. While he did not enter right at the peak, he entered too close to make anything on the upside (even temporary happiness) and when the blade finally came down, his portfolio was just shattered.
While I am no longer in the brokerage business to observe things as closely as I could way back then, I do wonder how much of the crowd-sourced information can lead to investors getting out of good shares and investing into small cap stocks that are going up each day more than what many a big share does in a good month.
The FOMO risk (Fear of Missing out) has a much bigger impact on us than we consider. If everyone around you is claiming to have won in a casino and while you having the knowledge that the house always wins have so far kept afar from getting into that trap, its just a matter of time before you finally decide to take a dive. This is how most Multi Level Marketing works too and best of all when every one finds out they were suckers, they always have their friends to comfort them with stories of their own losses and that some how makes one’s losses more tolerable.
Truth be told, a lot of investors do not have the skill set to Analyse the markets and for them, the best way to participate would be via ETF’s and Mutual Funds. But even those who have some skill set, do remember that markets and life itself being cyclic, it will and never shall be a case of one strategy being the winner all the time.
A lot of investors remind me of Abhimanyu (MahaBharat). They some how know how to get in, getting out is something they sincerely think will happen as easily. If only life was so easy.
If you want to be in this field, do remember that you will need a Edge to survive, a domain expertise of some kind that enables you to distinguish between the good and the bad, the ability to know when is the time to risk more and when is the time to close out the cards. Because unless you know something, you are a sheep that is slaughtered at the end of the line. As much as following some one else’s advise may get you through for some time, when the time is up, the guy who you followed will have escaped while you will be left wondering what the hell hit you.